Five Steps to Saving and Paying Yourself

As business owners, we sometimes forget to give ourselves the credit we deserve. Whether impostor syndrome is creeping in or we just become too busy to focus on the finances, it’s often reflected in the wages we pay ourselves. The common practice is to collect money from clients, pay business bills, buy more stuff, and then pay ourselves - and maybe then save for the future. Today, let’s dive into a different personal philosophy on how to save and pay yourself as a business owner while ensuring that you have enough for other expenses, including:

• Savings

• Taxes

• Expenses

You may have heard of Profit First by Mike Michalowicz. Michalowicz theorizes that you should pay yourself a “profit” before you pay anything else. He also has a method for saving for your various “buckets” which includes a separate checking account for each such as operations, owner draw, taxes, expenses, profit, etc. (If you do follow the Profit First model make sure you use a CPA or other professional that subscribes to the idea of this many accounts because your regular accountant may fire you!) 

My approach to business finances also includes saving for taxes and emergency funds and retirement up front. This method may allow business owners to move between months knowing that they can afford the usual necessities and have savings in case of an emergency. We can calculate your predicted monthly expenses to ensure no holes are burned in those pockets, plus, you don’t need nineteen bank accounts!

The Five Steps Towards Paying Yourself as a Business Owner: 

1. Receive Income

2. Save for Income Taxes

3. Add to Savings/ Retirement Accounts

4. Transfer Living Expenses to your personal account

5. Business Expenses

1. Receive Income

This is pretty straightforward. The payments that you receive from clients should go into your normal business checking account. They don’t bypass your business account and go directly to your personal account - ever.

2. Save 30% for Income Taxes

When income tax season comes around, there’s nothing worse than trying to quickly scrape together the money you might need. Factoring in money for taxes month-to-month not only encourages saving as you go (prior to deadline day!) but also allows you to track the taxes you owe closely. Some might say that saving 30% for taxes sounds like overkill. However, it’s important to check in with yourself on whether you’d prefer to have over or undersaved in case you get a nasty surprise when it comes to filing your taxes. Additionally, you may be required to pay estimated taxes quarterly and automatically setting aside a portion of revenue to pay for taxes keeps you from scrambling to fund the funds. 

Also, if you collect sales tax, it is vital that these funds are set aside to pay to the appropriate states monthly. Do not ever let yourself think you can spend this tax money and that you will replace it. Too many business owners get into this type of trouble. Download my Sales Tax guide if you’d like to learn more about preparing for Sales Taxes, conditions for remote selling, and the regulations for your specific state!

3. Add to Savings and Retirement Accounts

Taking on this money mindset means that you can immediately account for savings and later life planning. Prior to subtracting any money for living expenses or re-investment into the business, transferring over a portion into savings and retirement accounts is key. Savings should be treated just as you treat your house note or insurance bills. Too often, we think of savings as an “after I buy everything I need and want” type luxury. You could put money into one or more of the following accounts: 

• Emergency Fund

• Non-Retirement Savings

• Some type of retirement account based on your structure

We can work together to determine how much you’ll need to save each month to reach a desired retirement lifestyle or other savings need such as a wedding or a new home.

4. Transfer Monthly Living Expenses

There are many approaches to determining the “right amount” to pay yourself. If you don’t know how much you’ll need, you could predict the average cost of your monthly expenses including:

• Rent

• Transport

• Insurance

• Groceries and household needs

• And whatever else your money is regularly spent on!

It’s also worthwhile to budget for extras within your monthly expenses. Don’t end up taking money from your emergency savings to afford your monthly nail or hair appointment. Include it within your owner’s allowance to enable adhesion to the budget and ensure you are able to properly track how much you are spending from month-to-month. 

5. Business Expenses

The money that is left over which is not transferred to taxes, savings or the owner’s account can then be spent in your business! However, if what is left does not cover your business expenses, then we may need to evaluate these expenses. Ideally, you should not be spending more than 30% of your revenue on expenses. Of course, there will be times when you need new equipment or need to initially invest in training a new hire, but these should be expenses that you are also saving for. If time after time, you are forking over more than 30% to expenses then we have to figure out how to reduce expenses or earn more. 

Schedule a call to go through how this method could work for your financial situation and how to manage your money for the future.